How Europe can save for success

The European Union’s new finance chief has a golden opportunity to help citizens get richer. Maria Luís Albuquerque, the new commissioner for financial services and the savings and investment union, is well placed to lead the 27 member states towards a wealthier and more productive future. But to do so, she must help them coax citizens to take some of their money out of bank accounts and invest it in equities, stocks and other market-based products. 

More than a third of the EU’s total household wealth is in deposits, compared to about a tenth in the US. Getting even some of this money off the sidelines could have a substantial impact. If households are better off, they can start businesses, buy homes or increase consumer spending. They would also require less public support as they age, relieving strain on national budgets. If the total amount of invested money increases, European companies will benefit from better financing too, even if the proportion of EU funds invested at home does not change compared to the rest of the world.

EU policy can inspire a virtuous circle by creating a label for qualified retail savings products. Eligible products would be diversified, low cost and suitable for long-term investing. While some options exist today, access to them is not equal throughout the single market, nor are they sold consistently in a way that earns confidence from non-professional investors. An EU label could pre-screen these funds – making it possible to remove some of the costly red tape consumers currently face when they do want to buy funds – and help draw new investors into the capital market savings pool.

Albuquerque can expect support from Commission President Ursula von der Leyen, who made savings a mission priority and part of the formal portfolio, and also from European Central Bank President Christine Lagarde, who has called for new efforts. Yet EU finance ministries are wary of new EU-level action. To change the culture, Albuquerque should push past ‘one-stop-shop’ thinking and look for ways to activate each part of the financial ecosystem.

Past efforts have floundered. The Pan-European Personal Pension Product (PEPP) has been a flop, as financial firms and member states found the programme onerous to scale up. As of March 2024, five years after the programme’s launch, there was only one provider operating in four countries with a paltry €11 million under management.

Albuquerque should separate out the necessary components and act on multiple fronts. Here is how that could break down:

• The EU should develop a label for retail-oriented savings products that are appropriately diversified and carry low administrative fees. Qualifying products should be exempted from some of the more burdensome consumer protection red tape, perhaps by moving some requirements upstream instead of requiring assessments for each individual investor.

• Countries should consider making EU-labelled products eligible for tax-advantaged savings accounts, as well as in the context of occupational pensions and other retirement planning strategies. However, a good product shouldn’t need a tax break to find customers, and full harmonisation is not a prerequisite. EU countries have cautiously endorsed efforts to move forward by pooling best practices, and an EU labelling system might be a good umbrella for this to proceed.

• Financial firms should adapt their offerings to earn this label. While they may need to lower their fees, they also could gain access to a large new market. 

• Households should reconsider investing their savings, rather than keeping them in cash. Financial literacy and comfort with long-term, non-guaranteed assets vary widely. An EU label could help narrow that gap by building confidence in market-based investing.

With these building blocks in place, policymakers and industry players would have room to improve, compete and innovate. Firms could offer funds that are all equities, a mix of stocks and bonds or so-called target-date funds that shift asset allocation automatically as investors near retirement age. Within the EU guardrails, they could offer funds that invest in specific industries or regions. EU countries could also encourage certain kinds of funds within the parameters, perhaps by offering extra tax breaks to products that invest more heavily in European companies or that favour the green transition.

The EU already has a large universe of investment funds through its UCITS system, but too often these funds are perceived as risky, inscrutable or out of reach. To the extent that households do have access to wealth from market-based savings, it may only be through occupational pensions, which are underdeveloped and which are not available in all countries. 

Better savings options can help European households, financial firms, real-economy companies and member-state budgets. Improvements would complement other efforts to improve EU capital markets, such as more integrated supervision. Albuquerque should seize the moment and use her term to make a difference.

This First glance was also publish on L'Opinion in French.